With the implementation of the Check Clearing for the 21st Century Act (also known as Check 21) in 2004, financial institutions such as banks are now able to exchange check images to settle cash letters, rather than sending the paper checks for settlement. Check 21 has generally allowed financial institutions to realize significant savings in the time required to settle cash letters.
Under Check 21, a bank of first deposit (BOFD) or other sending bank uses Image Exchange to send check images to another recipient bank under the ANSI X.937 standard. The recipient bank, which may be a private bank or one of the Federal Reserve branches, conducts a quality assessment using specialized image quality software. If an image does not meet the recipient bank's image quality standards, the image is rejected and returned to the sending bank unpaid. These rejected images are sometimes referred to as administrative returns or non-conforming images. A rejected image typically requires the sending bank to physically locate the original paper check, re-encode the magnetic ink character recognition (MICR) line of the paper check, and re-process the paper check. This process takes a certain amount of time per check, which is undesirable. Even if only a very small percentage of images (e.g., one percent) are non-conforming, the handling of non-conforming images can nevertheless add significant risk and cost on the part of the sending bank where very large numbers of checks are processed every day, as is typical.
Although image quality assessment tools are commercially available, financial institutions have not been able to easily diagnose and resolve the root causes of the chronic image quality issues that are causing trading partners to reject the images. This problem is complicated by the fact that image quality standards typically vary from bank to bank and are often not known. This is because most banks purchase commercially available image assessment software from a third party provider, and most third party providers are not apt to disclose information about their proprietary image analysis algorithms, leaving the sending banks to simply guess how the software of each recipient banks assesses check images.
Moreover, even though existing check scanning equipment provides for adjustment of scan settings, there is a tremendous variability in the quality of the source checks involved. The adjustability of scan settings is meant to adjust for this variability. However, scan setting adjustment cannot be adjusted for each individual check—millions of checks are often scanned every day.